Effect of Transactions on Debt-to-Equity Ratio The following account balances ar
ID: 2749543 • Letter: E
Question
Effect of Transactions on Debt-to-Equity Ratio
The following account balances are taken from the records of Chagall Meadows Inc.:
Required:
1. Use the information provided to compute Chagall's debt-to-equity ratio. Round to three decimal points.
to 1
2. Determine the effect that each of the following transactions will have on Chagall's debt-to-equity ratio by recalculating the ratio and then indicating whether the ratio is increased, decreased, or not affected by the transaction. Round to three decimal points. Consider each transaction independently; that is, assume that it is the only transaction that takes place.
Current liabilities $146,000 Long-term liabilities 390,000 Stockholders' equity 400,000Explanation / Answer
DEBT-EQUITY RATIO = 390000/400000
= $0.975 : 1
a. Purchase of inventory on account is an item of current liabilities and does not effect debt-equity ratio.
b. Purchase of inventory for cash is an item of current assets and does not effect debt-equity ratio.
c. Payment to suppliers on account is an item of current and does not effect debt-equity ratio.
d. Receiving cash on account is an item of current and does not affect debt-equity ratio.
e. Payment of insurance for next year is an item of current assets and does not affect debt-equity ratio.
f. Sales on account is an item current assets and does not affect debt-equity ratio.
g. Repayment of short-term loans at bank is an item current liabilities and does not affect debt-equity
ratio.
h. Borrowing at bank for 90 days is an item current liabilities and does not affect debt-equity
ratio.
i. Declaration and payment of cash dividend is an item of current and does not affect debt-equity
ratio.
j. Purchase of short-term investments is an item of current and does not affect debt-equity ratio.
k. Payment of salaries is an item of revenue nature and does not affect debt-equity ratio.
l. Accrual of taxes is an item of current liabilities and does not affect debt-equity ratio.
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